Krugman’s blog, 4/11/17

There was one post yesterday, “Europe Has Problems, But Le Pen Is Not The Answer:”

France will have its presidential election in a few weeks, and there are understandable concerns that it may be another Trump shock. In particular, the travails of the euro have tarnished the reputation of the European project – the long march toward peace and prosperity through economic integration – and played into the hands of anti-Europe politicians. And French contacts tell me that the Le Pen campaign is trying to portray critiques of European policies from prominent economists as implicit endorsements of the FN platform.

They aren’t.

I’ve been a harsh critic both of the euro and of the austerity policies followed in the euro area since 2010. France could and should be doing much better than it is. But the kinds of policies the FN is talking about – unilateral exit from not just the euro but the EU – would hurt, not help, the French economy.

Start with the euro. The single currency was and is a flawed project, and countries that never joined – Sweden, the UK, Iceland – have benefited from the flexibility that comes from independent currencies. There is, however, a huge difference between choosing not to join in the first place and leaving once in. The transition costs of euro exit and restoration of a national currency would be huge: massive capital flight would cause a banking crisis, capital controls and bank holidays would have to be imposed, problems of how to value contracts would create a legal morass, business would be disrupted during a long interim period of confusion and uncertainty.

These costs might nonetheless be worth bearing under extreme circumstances, such as those facing Greece: a severely depressed economy that needs a radical reduction in costs relative to its trading partners might find even a costly euro exit followed by devaluation preferable to years of grinding deflation.

France, however, does not fit that description. French employment performance should be better, but it’s not terrible – prime-age adults are more likely to be employed than they are in the United States. And since the creation of the euro, French labor costs have roughly tracked the average for the euro area as a whole, so there’s little reason to believe that a restored franc would or should experience a large devaluation:

OECD

In short, for France exiting the euro would bring all the costs that Greece would have faced, without any of the benefits.

What about the EU in general? There is every reason to believe that membership in the EU, making France part of a far larger market than it could provide on its own, makes French industry more productive and offers French citizens a wider range of cheaper products than they would otherwise be able to buy. Sorry, but France just isn’t big enough to prosper with inward-looking, nationalist economic policies. And given the benefits of being part of a larger economic entity, being part of Schengen – which reduces the frictions and makes integration work better – should be seen as a privilege, not a burden.

I’m not by any means saying that the EU is fine, or that French policy is great. The European consensus in favor of austerity was immensely wrong-headed and destructive – and France has been far too willing to impose unnecessary austerity on itself. I sometimes say that the most serious economic ailment France suffers from is hypochondria, a willingness to believe propaganda that has portrayed it as the sick man of Europe for more than three decades, even as it continues to exhibit high productivity and decent employment performance.

The point, however, is that nothing the FN has to offer would move France in the right direction. Just because Le Pen and economists like me are both critical of European policy doesn’t mean we have anything in common.